Japan’s report : Hiroaki Misawa’s point of view, based in Tokyo, at Aberdeen Asset Management

(Disponible en Français) Hiroaki Misawa, assistant investment manager at Aberdeen Asset Management based in Tokyo, comments on the Japanese growth’s drivers, as the economy is facing a domestic demand near to its potential.

• Will the Bank of Japan cut the interest rates any further?

I do not expect any additional interest rate cut in a near future, provided that no serious currency movement or damage occur. By the way, we hadn’t anticipated the transition to negative rates so quickly, at the end of January. Having said that, the diversification of the Bank of Japan (BOJ) intervention’s methods, who is no more only focused on massive quantitative easing (QE), seems relevant. Will this strategy allow to reach the target of 2 % of inflation in 2017 ? No, and nobody believes in it. With a potential of GDP growth set only between 0 % and 0,5 %, as it is the case yet, this objective is impossible to accomplish. However, the fact that the BOJ is still communicating on this 2 % goal means that the expansionist monetary policy will continue.

• What is your analysis of the Japanese consumption trend?

The consumption’s weakness (a 0,9% decline during the fourth quarter 2015, compared to the previous quarter) isn’t a surprise. A strengthening of the demand can only come from the continuation of the reforms, even if, at the end, the potential for growth is not very high: The consumption of the households, who are used to buying just what they need, already represents 60 % of the Japanese GDP. Another structural brake in a demand’s increase is the demographic ageing. All in all, these elements are explaining why I do not believe that the Trans-Pacific Partnership (TPP) implementation will contribute to a significant reflation of the demand.

It is true, however, that a widespread salary raise could imply a reinforcement of the activity. Tangible progress could have already been observed in that domain, especially in larger companies. Now, this trend has to be spread to the small and medium-sized enterprises (SME), which are hiring 90 % of the Japanese working population. Also, a modest support for the consumption comes from the tourism strong expansion, directly correlated in the yen depreciation. Even so, this phenomenon, which may be short-live, can’t be a long-lasting engine to the activity.

• What is the impact of the implementation of the new governance code?

Its launch, last June 2015, has already produced some positive effects. Since then, we have noticed better dividend payout ratios. Moreover, we can meet and ask our questions directly to the companies’ top management, a kind of dialogue that couldn’t be settled beforehand. As a matter of fact, now, we will see if our messages will be taken into account. In any case, the shareholder governance is improving gradually, under the pressure of the government who makes a point to attract more foreign capitals.

Nevertheless, the equity market remains volatile, influenced by the foreign investors’ mood, wondering if the global growth is robust or not, too much focused on the yen short-term fluctuations. On the contrary, it is more relevant to consider the long-term impact of the currency depreciation on companies’ market shares, since it leads to a better investment return for the long term investors’ benefit. On top of that, a lot of lightly indebtedJapanese companies, endowed with promising technologies, are still enjoying a reasonable valuation.